Abstract

The objective of this study is to analyze theoretical as well as empirical soundness of the current monetary aggregates (M2) and to propose a broader monetary aggregate (M3), by exploring the functional characteristics and empirical relevance of financial assets. We used annual time series data from FY76 to FY03 and employed both the functional and empirical (F-M dual criteria) approaches.
The results indicate that current monetary aggregates seemed to have been defined more on functional considerations compared to the empirical evidence. The analysis of new set of financial assets suggests that, while the various savings schemes individually as well as in aggregate were able to meet F-M dual criteria, deposits of NBFIs failed to satisfy this criteria. However, the functional considerations suggest that these deposits should, nevertheless, be included in a broader definition of
monetary aggregates (M3).

Lim, Ewe-Ghee and Subramanian S. Sriram (2003), “Factors Underlying the Definition of Broad Money: An Examination of Recent U.S. Monetary Statistics and Practices of Other Countries”, IMF Working Paper WP/03/62.

Moroney, John R. and Barry J. Bilbratte (1976), “Money and Money Substitutes: A Time Series Analysis of Household Portfolios”, Journal of Money, Credit and Banking, Vol. 8(2), pp 181-198.